Royal Caribbean Reports Q1 2004

Royal Caribbean Cruises (RCC) reported a strong Q1 with a positive outlook for the balance of the year. But RCC did not change its guidance of a five to seven percent yield increase for the full year.

Net income was $95.8 million, or $0.47 per share, on revenues of $1.1 billion for the first quarter ended March 31, 2004, compared to net income of $53.2 million, or $0.27 per share, on revenues of $880.2 million for the first quarter of 2003.

RCC attributed the increase in revenue to an increase in capacity combined with an increase in cruise ticket prices.

"The market is absorbing new capacity well, and we are encouraged with the demand and pricing trends we are seeing for the remainder of the year," commented RCC Chairman and CEO Richard Fain, who also attributed the results to the efforts of the company's revenue management team and strategic marketing.

RCC's passenger capacity was up 13.4 percent in Q1.

According to Luis Leon, executive vice president and CFO, RCC is also continuing what he called "savings initiatives" into 2004. He said that the company had saved $12 million in 2003 by running less expensive fuel in the gas turbines and by running ships' engines more efficiently. Leon explained that running lower grade fuel would not cause maintenance issues and the only related cost was minor additional filtration. (GE referred comments to RCC.)

In 2004, RCC expects to consume 5.6 million barrels of fuel.

At the end of Q1, RCC's net debt to capitalization rate was 54.7 percent.

Turn-Around

Leon said that bookings and pricing had started to stabilize in mid-2003.

While Q1 generated a five percent yield increase, Q2 is expected to produce a net yield increase from nine to 11 percent compared to the same quarters last year, according to Leon.

For the year as a whole, the net yield increase is forecast to be up five to seven percent, said Fain, which is in line with previous guidance. Earnings per share guidance is in the range of $2.10 to $2.30 (compared to actual earnings of $1.42 for 2003).

While forward visibility remains limited, there are signs that the booking curve is strengthening. Fain said that 30 percent of the passengers are now booking inside of 90 days, compared to 45 percent last year.

Since last September, pricing has also been up across all the product lines. ''We are very close to where we were before 9/11," Fain noted, adding that another positive sign was that the remaining inventory for sale last week was 60 percent lower than at the same time last year.

According to Leon, the current demand is exceeding that of last year, and the call volume in Q1 was up 20 percent over last year, with bookings up 20 percent as well. Not only is the booking volume up, but the conversion rate is up as well, he added.

While RCC expects strong Q2 and Q3, it indicated that the seasonally weak Q4 may be a loss quarter again. (RCC lost money in Q4 03.)

RCC reported 5,512,049 passenger cruise days, for a load factor of 104.2 percent in Q1 04, compared to 4,743,164 passenger cruise days and a load factor of 101.7 percent for Q1 03.

Deployment

Jack Williams, president of RCC's two brands, Royal Caribbean International and Celebrity Cruises, outlined their 2004 deployment as follows: Forty-one percent of the capacity is in the seven­ day Caribbean market, an increase of seven percent over last year, with bookings, prices and load factors well ahead of last year.

Twelve percent is in the short Caribbean market, up three percent over last year, with bookings and load factors well ahead of last year.

Nine percent is on the Mexican Riviera, up 70 percent over last year, with yield just slightly up.

Eight percent is in Europe, up 18 percent over last year, with booked load factors significantly higher than last year, and with average per diems well above 2003.

RCC broke down its European deployment with 49 percent in the Western Mediterranean, 25 percent in Northern Europe, 14 percent trans-Atlantic, and 12 percent in the Eastern Mediterranean.

Seven percent is in the long Caribbean market, up five percent over last year, but pricing was somewhat down although higher than where 2003 finished.

Seven percent is in Alaska, up five percent over last year, with average per diems quite a bit higher than last year.

Four percent is in Bermuda, up two percent over last year, with booked load factors up about 20 percent above last year, but with modest yield improvement.

Four percent is in Panama Canal cruises, up 19 percent over last year, with booked load factors well ahead of last year. The balance of eight percent was not accounted for.

In related developments, Fain said that he was happy with "what we have in Bayonne," but that Celebrity may stay in New York.

Reinventing Celebrity

Williams also outlined efforts to further position and differentiate Celebrity, pointing out that the line has been selected the best premium brand by Conde Nast Traveler (magazine). He noted the new Cirque du Soleil entertainment offerings onboard and said that the efforts were starting to have a positive impact on pricing.

Williams also explained that the Celebrity efforts, such as the brand transformation and concierge service, have revenue upside and no costs. "We are reinventing the brand within narrow limits of economics," he added.

As for Celebrity Xpeditions, Williams said the product was regarded as a once-in a-lifetime unique opportunity (for passengers) and that it had a halo effect on the brand overall and a positive revenue impact.

Future Growth

RCC's capacity growth was 13 percent in Q1 04 and will continue at a rate of 12 percent in Q2, 12 percent in Q3 and six percent in Q4 for a total of 11 percent for the year as a whole.

In 2005, RCC's passenger capacity will grow by a more one percent.

In 2005 and 2006, with significantly less new capacity being introduced, RCC will be able to pay down debt, according to Fain, who said that in time, RCC will return to investment grade credit rating.

Looking forward, Fain said that RCC will find a balance between capital investments and the need to improve the balance sheet- continuing to grow, but at a lesser pace (than the last few years).

He noted that newbuilding costs were a combination of actual building costs, the exchange rate and the return on capital.

Fain also said that while RCC was not in discussions to acquire any European brand at the moment, it was no secret that the company has plans to grow in Europe.